The worlds largest TV broadcasting show, NAB, opened in Las Vegas this week with NAB’s EVP for Communications, Dennis Wharton, calling 2014 a “pivotal moment in broadcasting’s history”. He quoted four game changing issues to make his point: Aereo; retransmission consent; spectrum auctions; and radio re-performance issues. I would not disagree with Dennis that this is indeed a pivotal moment for the industry. However, the real issues facing the industry go far deeper and are far more radical than those quoted above. For almost 80 years, TV has been structured as a vertically integrated market. Broadcast TV networks have commissioned and financed content creation, distributing the output in a linear framework, the TV channel. Those channels were broadcast on specifically formatted terrestrial transmissions to bespoke receivers. In this world, production costs were high, and a terrestrial broadcast licence was a scarce and valuable asset that conferred significant competitive advantage on the owner. Over the last twenty years, the costs of content production have fallen dramatically. The number of alternative content distribution methods (satellite, cable and latterly online) has increased significantly and distribution costs have fallen. As a result, content has become abundant, with multichannel TV almost ubiquitous in the developed world and internet delivered TV increasingly popular. Indeed, at 29 million, Netflix has the highest number of subscribers of any TV service in the western world (pre completion of Comcast’s Time Warner Cable acquisition). Despite these major changes, the long predicted demise of the traditional TV industry has never quite materialized. Indeed, viewing figures for traditional linear TV have proved remarkably resilient to the attempts of on-demand internet video, mobile communications, and social media to dis-engage consumers from our TV screens. The traditional TV industry has been shaken, but not yet stirred. However, I do believe the time has now come where the relationship between the viewer and traditional linear TV channels is about to break down. Three factors converge to undermine today’s broadcast TV business:

The increasing challenge users face in finding content they actually want to watch

The emergence of “multiscreening” – simultaneous use of mobile (smartphones and tablets) while “watching” TV

The move of OTT players into content production

Program search With todays electronic program guide (EPG), viewers today are faced with the task of paging through hundreds of channels that have to be searched in order to find something interesting to watch. Attempts have been made to increase the utility of program search through pictorial “cover flow” on-demand services. However, those experiences still present the viewer with limited choice and long search times. These processes, based around the use of the TV remote, are now beyond the tolerance of even the most patient of viewers. What’s more, as the range of choices increase, the long tail of poor quality content increases disproportionately making search even more challenging. TV-based content search is no longer fit for purpose. The rise of “binge” consumption – watching whole series of programs at once – speaks in part to the challenges users face in finding content they like. Increasingly, users identify with a series - NCIS, Game of Thrones, House of Cards - rather than the channel that is showing those series. Increasingly, the user is using tools available outside the TV to find the content they want to watch. The main tool they are turning to is the mobile device (smartphone and tablets). The mobile is enabling the user to more easily curate their own content, a historically played by the TV channel. As users use mobiles to make choices based on series rather than channels, power is shifting away from the channels towards content producers. And as content search transfers to the mobile, traditional broadcasters lose one of the traditional broadcasters key USPs – a position at the top of the EPG. Multi-screening According to Ofcom’s Communications market report, 2013, over half of TV viewers in the UK now use their smartphone and/or tablet while watching TV. NBC reports similar numbers in the US. Most research still suggests users remain engaged with what is going on on TV while tweeting to their friends or checking out who’s saying what on Facebook. However, users clearly seek to multitask while watching TV. What is more, the accelerating adoption of tablets (UK penetration doubled to 24% in 2013) has dramatically accelerated the scope of multiscreening. Over 80% of tablet owners are likely to multitask with other media while watching TV. Hence, there is clearly a need for the TV industry to seek to provide a mobile component to the TV viewing experience, whether that be content search, social media, or enhancements to the program they are watching. The challenge for traditional broadcasters is that this is not natural territory for them to occupy. Device control and content search is a cross-content function more naturally handled by equipment manufacturers or platform operators. Social media is the domain of …. well, social media players (as attempts to date to aggregate social media and content control in one app will testify to). It’s only in providing franchise or content specific apps that the broadcaster has a natural opportunity to add value and engage audiences effectively. The OTT threat

Lastly there is the ever growing threat of competition from OTT players. After many years of developing their services based on back catalogue content, Netflix, Amazon, Microsoft and Yahoo have all now started to invest in original premium content to attract consumers. This is perhaps the most significant issue for the TV industry. Users are for the first time buying an OTT service to get access to NEW premium content experiences, not just to relive old ones. That is precisely the principle on which satellite and cable platforms have attracted paying subscribers over the last twenty years. Taken together, these trends threaten to further accelerate control of the TV experience from the TV to the mobile device, and in so doing encourage rapid adoption of OTT services that provide original content. While this may not switch viewing away from traditional channels overnight, it will accelerate audience fragmentation and shift power towards both OTT players and content producers.

Long live the program maker. So how should traditional broadcasters react? Clearly the TV channel will not disappear overnight. The traditional industry has time to react. However, broadcasters must start now to make serious efforts to re-shape themselves for the inevitable changes that are being brought by the internet age. At a time of major market disruption, an organisation needs to look at itself and understand what its core mission and purpose is. What is its USP? What is its core competence? How does it add value to the consumer? The new world of internet distributed and mobile controlled content is a world where the quantity of available content is high but quality content is scarce. In this world, quality and premium branding will out. Brand presence backed by quality programing will be essential to engage consumers. This plays to one of the key strengths of the traditional broadcaster - content commissioning and creation. Broadcasters need to unhook themselves from the means of distribution, reshape how they finance, aggregate and curate content, and seek to deliver a service that is excellent across all distribution channels, including in particular smartphone & tablet. It also means reducing reliance on EPG positioning to secure audiences, and focusing on the development of a presence on App stores and other online market places. Others will be seeking to occupy the same space. Over time I fully expect that the distinction between major production houses and network channels will be lost. Both will be financiers of content. Both will offer content direct to the market through the content search and discovery interfaces of tomorrow. However, the alternative for the broadcaster is that they go the way of other traditional industries – print media, music, and increasingly the mobile network operators themselves – consumed and supplanted by Internet giants and other, more nimble, “Over The Top” players.

I have roughly 200 apps on my phone spread across five pages and ten folders. By default, I enable notifications on the basis that if I have downloaded the app, its because it is doing something useful or interesting for me. Same thing on my mac. However, with this number apps it seems that every minute of the day my iOS devices notify me of new emails, new SMS’s, tweets, Facebook posts, new “friends” who have joined Tango, news stories from the BBC and Bloomberg (what possessed the BBC to add audio to their notifications!?), offers on games (my son insisted I download Avengers Assemble!), Pizza Hut offers, even the GSMA … the list is endless. Of course I have a choice –switch off all notifications app by app. But this reduces the utility of the app, and how many of us have the time to go through our list of apps and work out which apps I want to interrupt me and which I want silenced? So what’s the answer? The mobile user experience conference, MEX14, last week, provided a fascinating insight into how we respond to the stimuli presented to us by our digital devices. Giles Colborne of CX Partners quotes three timing principles UX designers need to consider when designing apps:

0.1 seconds – the minimum length of time we can discriminate. If an app responds to an action within 0.1 seconds, we perceive it as instantaneous.

1 second – the comfortable length of pause in a dialogue that we still consider to be natural speech

10 seconds – the amount of time to take to switch from one task to another.

This last figure explains why we find notification so irritating. If it takes me10 seconds to focus my attention on a Facebook notification then 10 seconds to re focus back onto writing this blog, I have just lost 20 seconds of productive activity. If I get one notification every three minutes, I am losing over 10% of my time to just switching between tasks. That's not just a problem for me. Its also a problem for the advertising industry. In particular, it's a problem for TV advertisers in this age of the second who account for around $100bn of the $240bn spent on advertisting in the US and Europe. If an advertiser loses the attention of the user to a tweet during an ad break, it takes at least 20 seconds or two thirds of the 30 second slot, before you get that user’s attention back again. That is a direct loss of value for your advert. As the number of apps and amount of app traffic grows, so the more notifications increase, and with it the probability of any one ad being interrupted. Apps need to get smart. They need some form of context awareness through which they can adjust what is notified to the user and when. The notification systems devised by Google and Apple are crying out for a fundamental re-think. At MEX we identified five major contexts or “modes” that we as individuals operate in (There are many more.):

Entertainment, (e.g. I’m watching TV)

Inspiration, (I’m deep in thought)

Operational (I’m at work standard working tasks),

Social (I’m out and about and want to chat)

Travel (e.g. I’m commuting)

We identified key characteristics defining each mode, and started to design principles describing what is appropriate to notify a user in each mode and when. Evolving this approach further, cognitive learning algorithms can be defined around the sensors on our devices to enable the system to detect the mode we are in and change our response to individual situations. Google Now is an excellent start down this route. The ultimate goal must be to enable users to engage more effectively with the digital ecosystem in what is currently a noisy and distracting environment. Engagement times user base is the key value metric for todays internet stocks. Facebook paid $40 per user for Whatsapp based on 450m people using the app more often than any other app on their phone. Line, a close competitor to Whatsapp, generates $12 per user per annum in revenue from its app in Japan. That compares to $7 per user Facebook generates per annum. Facebook is clearly paying for premium engagement. Right now our appreciation of how notifications from multiple apps diminishes engagement on our phones, tablets, laptops, and TVs is incredibly basic. Our understanding of how that translates into lost value for the brands that fund large chunks of the internet is even poorer. This is a massive issue that is fertile ground for research and innovation … and value creation.

With yesterdays USD16bn takeover of market leader Whatsapp by Facebook and last weekends USD900m sale of Viber to Rakuten, I thought it would be appropriate in this first issue of the second edition of my blog to consider why successful and apparently rational internet majors are buying up chat apps. These transactions are rich by any measure. Facebook has paid perhaps 40x revenue in the case Whatsapp. Ratuken has paid a reported 600x revenue in the case of Viber.

Having built their businesses on the PC, the internet majors are now looking to position themselves to deliver online commerce in a word increasingly dominated by mobile. As, in the words of Benedict Evans, “Mobile eats the World” , none of the majors who have grown up on the PC can afford to sit on the sidelines as the mobile retailing experiment that is chat plays out. That experiment is discussed in detail below.

Facebook and Ratuken have fired the starting gun on chat app M&A. Who will follow them, and how those services evolve will be a major industry theme for 2014.

2013, a year of dramatic chat app growth

Chat apps have had a pretty spectacular twelve months, rivalling Candy Crush (King) and Clash of the Clans (SuperCell) as the online theme of 2013.

In December 2012, Chat rose to the surface of general consciousness when Informa and the UK’s Financial Times announced that chat traffic had for the first time exceeded SMS. At the time, the leading market players had around 150m users each with perhaps an aggregate 1 billion downloads in total across the segment. Today, the four leading players alone - Whatsapp, LINE, WeChat and Viber - have amassed collectively over 1.4 billion users. A raft of other significant players including Facebook Messenger (now presumably to be wrapped into Whatsapp), Skype, and Snapchat take that figure well over 2bn downloads (Note that on average chat users use three apps each). San Francisco online researchers, Flurry Analytics, reported that, at 203% year on year in 2013, messaging usage was the fastest growing of any mobile app category.

However, as any internet entrepreneur and their backers will testify, growth in user numbers is a necessary but insufficient condition for success. What is also needed is user stickiness and (ultimately) a good monetisation strategy.

Signs of stickiness

What peaked the interest of Facebook and Ratuken is the level of engagement users have with their messaging apps.

It is clear from a number of sources that good messaging apps are very heavily used:

63% of those surveyed use their apps more than 10 times per day, more than voice, email and even SMS.

Research by Tomi Ahonen in “Communities Dominates Brands” suggests messaging is used more than any other service on your phone.

Intuitively, this level of engagement makes sense. We are at heart social animals (as Facebooks USD 170bn market cap can testify). Make it easy for us to interact with those closest to us, and we will be drawn back time and again to that app.

Monetisation: Chat Platform vs Pure Chat

The frequency and nature of our interaction with chat apps represents a massive opportunity to engage users in other services and activities that users may be interested in. If an organisation is able to tap into this level of engagement, use it to offer users more of what they want – and hang onto their users in the process - then the opportunity to monetise that engagement is massive.

So far, two organisations - LINE and KaKao Talk – stand out in their ability to monetise their chat communities. Both companies have essentially created “Chat Platforms” - apps and APIs that enable their own developers and third parties to offer a range of games, content, sponsored social feeds, and other apps around the core chat service.

This model has proved extremely successful for LINE who generate approximately USD 12 per user per annum from their Japanese subscriber base. This level of success has attracted a growing number of businesses including global brands such as Coke, MacDonalds, and Barcelona as well as a host of local companies looking to engage with the community. With the recent launch of music services, and an in-app app store, LINE is also looking to expand the platform model considerably.

Kakao has achieved similar results in Korea through an almost identical strategy, generating roughly USD6 per user per annum. With Facebook itself achieving around USD 7 per monthly active user across 2013, those are numbers that are clearly meaningful to Facebook were they to replicate them globally.

However, outside of Japan and Korea revenue generation from chat apps has to date been minimal. Intuitively there would appear to be no reason why users in other markets would not want to interact with relevant content in a similar manner - albeit with content reflecting local tastes and culture. We are all made from the same DNA after all. Tantalisingly, the OnDevice survey suggests that users in other markets are starting to warm to this model. But to date, actual monetistion has been very poor.

The alternative view is that the messaging app should remain pure and unadulterated by “distractions”. Chief amongst the exponents of this view is, ironically, Whatsapp, who as an independent entity, shunned content and advertising and instead charge a portion of their users USD1 per annum for the service. Their leadership of the segment, confirmed in the OnDevice survey, is strong evidence that “keeping it clean” works.

More Chat Platforms will emerge in 2014 ..

I believe it is highly likely that the acquisition of Viber and Whatsapp by two players adept at monetisation of online properties will see those players looking to make the Chat Platform concept work outside of Asia. In particular, Facebook’s knowledge of a users social graph places them in an outstanding position to offer chat users relevant content and connections. The maturity of their API and the app ecosystem they have built up are tailor made to be extended to the Chat Platform concept. Judging from the performance of LINE and KaKao Talk, its perfectly conceivable that Facebook could double revenue per user through the monetisation of chat... and more acquisitions are inevitable The inexorable shift of online to mobile and the engagement users have with chat apps had already raised interest in chat communities. Facebook’s move yesterday has dramatically increased those stakes. Regardless of whether you believe in chat monetisation or not, the potential costs of being late to the party and missing such a potentially tectonic shift in the monetisation of the mobile internet landscape is simply too great for other major internet players to ignore. A billion dollar acquisition of one or more of the remaining chat apps is now an essential bet for the likes of Google, Amazon, and Yahoo! to place. Mike Grant

Disclosure: Mike Grant is a shareholder in Myriad Group AG, a provider of chat apps to emerging markets.

An extraordinarily busy second half of 2011 has meant its been six months since my last post. However, the ending of two projects plus the upcoming Mobile World Congress has encouraged me to put pen to paper again.

As the deployment of commercial 4G services continues to gather pace, two issues in particular have grabbed my attention:

the not insignificant challenge faced by the mobile industry in making the batteries in next generation of handsets last an average working day

transitioning literally billions of consumers from traditional narrowband voice and messaging services to IP based equivalents without bankrupting the industry in the process

More on the second of these issues in a later post.

The mobile industry is generally well versed in addressing the challenges associated with bringing 4G services to market - spectrum acquisition, network upgrades, handover between 3G and 4G, and indeed getting handsets to market on time.

However, few within the industry have fully grasped the scope and ramifications of the personal “energy crisis” that 4G appears likely to introduce to the hapless consumer.

With the rise of the smartphone, we have all got used to having devices where the battery lasts roughly a working day - rather than the 7 to 14 days that used to be the norm 10 years ago. Generally, mobile users are happy provided they can make it to end of the day with some charge still left, enabling them to plug the device in overnight and replenish its energy stocks for the next days activities.

Battery life is of course highly variable, driven by the type of use the handset is subject to - the amount of emails a business users sends from the field, or the number of posts a consumer makes to social network sites like Facebook. However, regardless of usage patterns, that working day “lifetime” is a key threshold for user. Operators are quick to point out that when too many customers breach that threshold too often, customer service calls, handset returns - and costs - quickly rise, indicating at the same time an increase in unhappy, churn prone customers.

So I was somewhat surprised to find that , when it comes to battery performance in the latest generation of 4G handsets, the disconnect between expectation and reality – and between operator and OEM - is large and increasing. GigaOM recently commented that many new US 4G users are reporting battery lifetime’s half of that of their current generation smartphoneshttp://gigaom.com/mobile/when-will-lte-stop-sucking-your-battery/, taking them well over the “working day” pain threshold.

Caru Ventures and RTT Programmes (www.rttonline.com) recently undertook a piece of work for Nujira, (www.nujira.com), a Cambridge based start-up providing technology to improve radio transmitter efficiency, to understand the underlying causes of increased power consumption in LTE handsets, and the potential for power efficiency technology to address those problems.

In common with others, we found that the main reason behind degraded battery performance is the increased demands LTE places on the handsets radio. Higher underlying bit rates together with a network set up to maximize throughput by making handsets transmit at faster data rates for longer mean a 4G radio will consume approximately 6x - 8x more power than the equivalent 3G (HSUPA). As a result the radio goes from accounting for 10% of the total device power budget in 3G to nearly 50% in 4G, entirely consistent with GigaOM’s reader reports.

However, we also found that Operators and OEMs are not engaged on ensuring handset radio’s maximize their use of battery power. Talking to a majority of the top ten operators worldwide during the study, what we heard were concerns over current battery performance and a desire to engage more with the supply industry on how to meet consumers expectations on battery performance, but limited understanding of how to address the problem.

Why does all this matter to the average man in the street? Well, 4G mobile should be a key component of all our economic futures. Numerous studies have shown that GDP per capita is intrinsically linked to the quality of broadband available in a community. 4G promises significantly faster internet access over a much wider geographic range than has been possible with 3G, speeding up business processes and letting consumers interact more efficiently. Many rural communities will get their first broadband services of any type over 4G.

If 4G handsets fail to break the “working day” threshold when used in anger, the service will quickly be rejected by consumers and the economic benefits will not be forthcoming.

As the Caru/RTT study on radio efficiency in handsets discusses (http://bit.ly/yqVIeh), there are significant steps that can be taken relatively quickly to mitigate this problem. The industry should be prioritising development of solutions to this issue before a local energy shortage becomes a full blown crisis.

As users, we need to hope that the problem gets resolved before 4G hits the market in earnest and we start parting with our hard earned cash on the latest iPhone.

This month, the Caru Ventures blog is being issued under a new banner. As I mentioned at the start of the year, I am working with a number of partners on the development of a new type of venture capital fund. I’m delighted to be able to introduce to you this new organization, Northface Ventures. The project is still in the validation phase but is gaining significant support from potential partners both corporate and institutional. I hope to share more details over the coming months.

I’ve been considering for the last week a range of topics on which to share some thoughts following a welcome summer break. Indeed, I was looking to move away from the “big corporate” dynamics that have dominated most of these posts this year to date. However, yesterday’s news of Google’s agreed offer for Motorola blew all that out of the water. What a game changer, from way out of left field!In summary, what Google has acquired is:

The worlds eighth largest manufacturer of mobile handsets and tablets.

The worlds second largest TV Set Top Box manufacturer

As others have been quick to point out, the patent portfolio will give Google a useful armoury with which to defend the Android platform and the Open Handset Alliance (OHA) against patent infringement suits by Apple, Microsoft, Oracle and others. It is also the main reason why, in public at least, many of Google’s Android partners have welcomed the deal.

Acquisition of the handset division gives Google ownership of arguably one of the leading Android hardware design and manufacturing teams. Both Droid and Xoom have been well received by the market, and have been a major reason for the Motorola turnaround over the last twelve months. Limitations in distribution reach appear to be the main constraint on the success of those devices, something Google’s marketing and financial muscle could quickly help address.

The acquisition also gives Google another option for “fixing’ Google TV. The platform has been struggling to take off, in part because the Google TV experience has been less well received than hoped, in part because broadcasters have withheld rights to stream content through Google TV boxes. That Motorola may now switch focus to Google TV may not please Motorola’s biggest STB customer, Comcast, (and that is a big risk). Nor may it have content owners flocking to its door. However, again by bringing hardware and software design under one roof, it does provide an excellent in-house platform to get this product off the ground and to go on and build a truly convergent experience across core device types - TV’s, tablets, and mobiles.

I share one thing in common with Stephen Elop. We are both big believers in vertically controlled device ecosystems offering seamless experiences across multiple device types. As Elop said at the Open Mobile Summit in June, “Future competition will be between ecosystems, not between manufacturers of individual devices”.

The key question is whether those ecosystems can be created by independent manufacturers and software vendors working in concert or whether bringing software and hardware under one roof is essential for success.

In-house control of both hardware and software has certainly been a key element of Apple’s recent success, a strategy that has seen Apple double in value over the last two years while Google (and Microsoft) shares have tracked sideways within a defined range. Google’s recent introduction of anti-fragmentation clauses in its Android licences and its delay in releasing source code for Honeycomb both suggest that Google realizes the need to gain greater control over the user experience it offers across multiple devices.

If you share the “one-roof” view, then this transaction is a logical next step. It is worth noting that the financials and shape of the combined entity (Revenues of $41bn, margins of 25%, strong in-house hardware and software design teams) look very close to that of Apple at the end of 2009.

If instead you are a believer in open software platforms independent of hardware manufacturing, then you will expect to see Google sell off the manufacturing arms of Motorola while retaining the patent portfolio with which it can defend the Android community. Quite what value can be realized from a manufacturing design house without IP, is not clear to me.

In reality, the transaction is probably Google seeking to defend the Android ecosystem while hedging its bets on verticalisation. OEMs that use Android have few options over the next 12-24 months other than to continue product development around Android while they look to develop alternatives. Hence, the Open Handset Alliance community will probably remain intact for that period at least.

In the meantime, Motorola have that period of time to produce a set of devices across mobile, tablets and TVs that offer real competition to Apple. In the same window Google must also figure out if they can reach an accommodation with the major rights holders to allow their content onto Google TV. If Googorola succeeds in both of these areas, the combined entity is in play. If it fails, Google will sell the manufacturing units, and look to keep its OHA partners on board.

So last month it was “Nokiasoft”, this month its “Microskpe” .... or should it be “Mickiaskype”??? The names may be convoluted, but the underlying theme of “Connecting Everything” is a very real goal. The question is how far do we as consumers want companies to go in trying to make TV, social, voice, and the myriad of other services we use easy and seamless to access across multiple devices? As regular readers of this blog know, it’s a question I’ve been pondering over for some time – not just how far should companies go but how far can they go, particularly the consumer giants that are driving the current wave of convergence. On June 8th and 9th, the Open Mobile Summit, produced by my good friend Robin Batt, will take place again in London (www.openmobilesummit.com). This year’s theme appropriately is “Connecting Everything”, and the day 1 keynote is Stephen Elop, CEO of Nokia. I, like many, am keen to hear his views on how Nokia and Microsoft plan to execute their convergence strategy, and in particular where Skype fits into this picture.

The $8.5bn spent by Microsoft on Skype is a pretty major statement of the value Microsoft sees in a 170million user ecosystem as the core of its future cross device communications strategy. The deal has sent media hacks into a frenzy again, variously describing it as inspired, overpriced, and fraught with execution risk.

For once I have to agree with the general tone of most of the commentary. The deal is in principle a great fillip to Microsoft and Nokia's ambitions to be a major cross platform global force. It provides them with both a software platform, and crucially a sizeable network of users around which to build tomorrow's mobile voice services. While the marginal cost of carrying voice over today’s mobile networks is considerably lower than the retail price, an installed base of handsets designed to deliver voice only over circuit switched networks sustains high voice margins for mobile operators. However, as we move to 4G LTE networks, structural reasons to keep voice separate from other forms of data will disappear. At some point therefore, a seamlessly integrated VoIP client and all inclusive unlimited voice minutes at a flat monthly rate becomes inevitable. At that point, Skype's service and user community should be a key asset for a “Mickiaskpe” to exploit.Skype has also built a very useful foothold in internet TV, a key target for Microsoft and it's partners. Again, potential exists to build out rapidly from this substantial beachhead in the landgrab that is the convergent media space.Much has been said regarding Microsoft overpaying for Skype, and the numbers surrounding the deal make that position an easy one to argue. However, the truth is we will only know some years down the line whether the deal was worth the money or not. Mark Volpi, ex CSO at Cisco, recently made the point on Gigaom that the valuation of a deal of this type is less important than the option value. As any VC or M&A exec will tell you, 2 in 10 acquisitions will succeed big. When they do the initial valuation price is inconsequential. As ever, it will be Microsoft and Nokia’s ability to execute that will be key to value creation. Successful execution will mean integration of the Sype community with Windows Live and Hotmail followed by consistent and rapid deployment across mobile, tablet and TV platforms. Hence, Stephen Elop’s view on Skype and the speed with which the Skype client will be seamlessly integrated into Windows Phone 7 and on into Nokia handsets will be a interesting pointer to the likelihood of the deal being a success.

Google’ quarterly earnings call last week highlighted the momentum Android, Google’s mobile phone OS, has established in the market. The company reported that it was now seeing 350,000 new activations a day, a run rate of 127 million units a year or 10% of global mobile shipments . This is quite a milestone to have achieved two and a half years after the launch of the first Android phone, the G1. One of the reasons for Android’s success is the speed of innovation the team have delivered. Android was launched in response to the perceived slow pace of evolution in a mobile software platform market controlled by a few dominant handset OEMs. Since the introduction of the first public release of Android in February 2009, Google has released ten versions of the platform. The latest in February this year included features such as support for gyroscopes and Near Field Communications, a core technology for contactless payments systems.

February also saw the release of the first version of Android to explicitly support tablets. With Android application support for Google TV also slated for later this year, Google will soon have a platform that is truly cross-device, something only Apple’s iOS has been able to claim to date.

Unlike iOS, Android is, of course, a platform on which companies other than the platform maker builds devices. A feature that has attracted OEMs such as Samsung and Sony Ericsson to use Android is that they are able to take an Android release and develop their own custom variations of the platform. Motorola and LG for example have both build new custom UI’s to provide a distinct and differentiated experience for users.

It is this rich ecosystem of software innovation from multiple parties that is arguably a key factor behind Android’s success.

However, the range of different versions of Android that results from this approach creates problems for software developers and content companies who are trying to build applications and services that run on Android devices. Depending on which features of Android an app uses, developers frequently need to create different versions of their content to cover multiple versions of the platform on which they want the app to run.

This platform fragmentation increases the cost and complexity for developers and high profile players such as Rovi, makers of Angry Birds, and Netflix (http://bit.ly/gSCoyQ ) have both struggled recently to ensure their apps are available on all mobile phones. With the prospect of tablets and TV apps increasing fragmentation further, the risk is that those costs could potentially spiral out of control.

In a sign that Google is looking to address the fragmentation issue, Business Week recently reported (http://buswk.co/g7TUZi) that Google is starting to enforce “anti-fragmentation” clauses in its licences, constraining OEMs from creating their own versions of Android. Going forward, it may well be the case that OEMs would be licenced to ship only those versions of Android created by Google.

This move towards a homogeneous, centrally controlled platform would be good news for developers struggling with the economics of application creation, particularly those that seek to develop apps over tablets and connected TVs as well phones. However, it would also be bad news for OEMs. The opportunity for them to innovate and differentiate will diminish over time. Instead, product feature sets would increasingly be dependent on Google’s internal or community sourced innovation programs. According to Business Week, Google’s moves to control platform specifications have already attracted the interest of the US Justice Department. Google have already been referred to anti-trust authorities in South Korea for allegedly blocking OEMs from incorporating custom third party search features in Android (http://bit.ly/f4njgL ).

Nevertheless, this structural move towards cross-functional software platforms seems inevitable. Consumers clearly want services that run seamlessly across multiple devices types. Simplicity of operation is the key. And that only comes with homogenous, cross-device software platforms.

The key question for the consumer electronics industry – and indeed for Google itself - is whether players other than Google can step up and provide competitive platforms on which those products would be built?

The industry needs healthy, balanced competition between a number of equals, not an Android army of occupation dictating to the rest of the industry what features sets will be incorporated in the platform and when.

As I commented in my blog a couple of months ago (http://bit.ly/gSkgH4), the Microsoft/Nokia tie up would seem to be an attempt by those two organisations to create a viable competitor to Android. However, both Nokia mobiles based on Windows Phone 7 and the new tablet versions of Windows are at least twelve months away.

As yet, the few other organisations have shown any signs that they are in a position to offer a comprehensive platform. Samsung has taken steps to introduce a more homogeneous device strategy, backing the Galaxy product series as the pillar of a multi-device platform strategy. But that device is an Android device, and the organisation appears some way off from turning Bada into a viable cross device software platform extending to both tablets and TVs. RIM and HP, both with technically proficient mobile platforms, have yet to gain market traction.

Many players believe the solution lies in using the capabilities of HTML5 to produce a cross-device execution environments within a browser. Whether the W3C can deliver a standard sufficiently robust to meet the needs of both manufacturers for differentiation and the content industry for homogeneity remains a very big question.

On June 8th this year, I’ll be chairing a panel session on multiscreen media experiences at the Open Mobile Summit in London (www.openmobilesummit.com). With the events theme being “Connecting Everything”, one of my key questions to that group will be how quickly they expect to be able to create cross-platform experiences for users beyond the Apple environment, and who they expect the key technology partners to be to deliver those experiences.

With Stephen Elop, the Nokia CEO, also delivering the keynote address at the event, it is the ideal occasion to ask how he sees Nokia supporting cross-device consumer demand going forward and whether Nokia/Microsoft, Apple, and Google really will be the only cross platform games in town.

If you are coming to the Open Mobile Summit, use the DISCOUNT CODE: CARU before April 21st for an extra reduction on the list price.

It takes only a glance at any industry blog or trade magazine to realize that connected TV is the key industry talking point in 2011. With column feet of comment and analysis, and manufacturers falling over themselves to offer any sort of proposition with the “Internet TV” label, it’s easy to dismiss this trend as hype. How can the simple act of changing a one-way broadcast TV service into a bi-directional interaction alter the nature of a multibillion dollar industry that’s been the bedrock of home entertainment for nigh on 60 years?

Recently, I visited my friends at Redshift Strategy, where CEO Stephen Taylor has assembled a demonstration suite of connected TV products. Most of these products have still to launch in Europe, and so, like many who have crossed Stephen’s door in the last few weeks, it was my first opportunity to experience the joys of Logitech Revue, (their current Google TV offering), Roku, Vudu, Samsung’s Internet@TV, and a range of other similar offerings. An hour later we were still pouring over the structure and nuances of the first product we looked at, Logitech’s Google TV box.

After the struggle at CES with Google pulling products from the show at the last minute, I was expecting to see a poorly implemented mash up of a PC screen on a TV with few coherent and compelling services. Logitech’s product is still rough around edges, but it demonstrates clearly why every organisation in the industry needs to sit up and take notice of connected TV.

Google TV is an overlay box, which means it takes as an input the output from a standard cable, satellite or DTT service and renders its own menus, search screen and apps on top of that service.

The seamless manner in which linear and internet worlds were integrated on the one screen was extremely compelling. Switching between standard TV (in this case Sky HD) and the internet TV menu is simple and slick. With linear TV front and center you are unaware that Revue is sitting underneath it. At the press of a button, the entire EPG - including picture in picture of the channel you have selected – is itself reduced to a picture in picture. You are then presented with an intuitive, iPhone style internet apps menu with the opening page consisting of a search option plus eight apps. Search on any term – film or series title, actors name, producer – and you are presented with choices from across both linear TV and online apps providers such as HBO, New York Times, or YouTube. One click and you jump straight to the chosen content or application. Add in the use of a mobile or tablet as an integrated, synchronised companion screen (something that’s still to come for Logictech), and searching becomes even easier. The companion screen will also allow multiple viewers in the one room to personalize that viewing experience, or engage with other viewers or program makers on Twitter or Facebook.

These capabilities will undoubtedly enrich the experience for users, providing greater choice and easier access to a wider range of content. The ability to seamlessly access popular internet services will also be welcomed.

For broadcasters and program makers, direct access to real time audience conversations and feedback around a program will shape production processes, opening up for example opportunities to change storylines or influence character development from week to week. The opportunity to present out-takes or alternative camera angles to consumers on companion screens will add another dimension to the user experience.

However, as creative complexity increases, so inevitably will costs. Production costs will rise as the complexity of the process increases. Distribution costs will also increase as output formats proliferate to match the wide variety of device specifications that will appear from manufacturers. Online video distributors today have to create 30+ versions of content to satisfy consumers using different Set Top Boxes, PC’s and a small number of mobile phones. Expect this variability to rise by at least an order of magnitude as new connected TV boxes and companion devices come to market.

Most significantly, increased choice will fragment audiences further, reducing revenues to individual broadcasters and program makers. Competition for the attention of the consumer will become increasingly fierce. In particular, the battle between platforms, broadcasters and third party apps providers to be on the default screen when the box is turned on will be intense.

Brands will become increasingly important as consumers start to explore this new world. Consumers will naturally migrate to the channels and franchises they are most familiar with, giving existing broadcasters and platforms a head start in this market. However, if a brand fails to adapt quickly to this new ecosystem and exploit its potential, consumers will very rapidly move on. The need to adapt quickly to rising costs, increasing competition and falling revenues will be the core challenge for the industry. Retaining the attention of the consumer is core to revenue generation. To do this in a connected TV world, broadcasters and program makers will need to look away from the traditional schedule and focus instead on understanding and responding to how consumers are interacting with content in all its dimensions – large screen, small screen and in conversation. That in turn will require a fundamental change in culture, processes, and behaviour.

I was astonished by the negative response of both markets and bloggers to the announcement of the Microsoft/Nokia tie up last week. The 15% fall in Nokia’s shareprice on Friday said more about the markets lack of understanding of Nokia’s position prior to the deal than it did about the prospects for the alliance. It has been obvious for months that Nokia has been in serious trouble, failing to respond effectively to the dual threats to its business. At the high end, Apple and Android have been undermining its high margin smartphone business, capturing significant market share. At the same time, Chinese manufacturers are eating Nokia’s lunch in core low price, high volume markets including China and India. The net result of those threats is that its market share is in freefall, down from a high of 38% to 31% in the last quarter. As market share falls, Nokia’s ability to leverage scale economics, central to its market dominance, is undermined.

Every since Stephen Elop took over Nokia last fall, it was clear that a close tie up with Microsoft was more likely than not in order to try and bring the company back from the brink. Windows Phone 7 may not impact directly Nokia’s volume business, but in providing a viable solution for business users as well as a highly acclaimed consumer proposition, it does give the company credible competitive weapons with which to fight back in those markets.

Microsoft too has a compelling requirement to do this deal. With the introduction of Windows 7, the UI and cross device integration upgrades to the Xbox, and porting of windows onto ARM to support the tablet market, the company has made major advances in the consumer market. However, with no effective mobile offering Microsoft was still devoid of competitive weapons with which to take on Google and Apple.

This is a merger that enhances the future prospects of both companies. Indeed it was the only step that makes sense.

Where does this leave others? Well Apple I am sure will barely raise an eyebrow to this development. The alliance is still two years away from being able to provide a product set that will be competitive to the integrated offerings of iTouch, iPhone, iPad, iMac, and Apple TV. The only issue holding Apple back now is the continued reluctance by content players, and in particular the major studios and broadcasters, to engage with Apple and allow it to offer both standard broadcast and paid TV offerings through iTunes/Apple TV. Ironically, this deal may benefit Apple as there may now emerge a credible competitor to its platform, giving content players at least two viable routes to online customers, hence increasing the chances of the studios doing business with Apple.

For the major OEM’s - Samsung, LG, Sony, et al – the problems have just increased by an order of magnitude. The value of being a “mobile only” or “TV only” provider will continue to diminish. As Apple – and increasingly Microsoft - has shown consumers want content and services available seamlessly across TV, mobile phone, PC and tablet – whatever combination of products they have. To deliver this, all of those devices need to work on a single, homogenous software platform.

The major OEMs are both culturally and structurally unsuited to respond to this fundamental need. Within each organisation, product teams compete to create different types of differentiated – and crucially incompatible – products. Software fragmentation as currently practiced by these players economically will not work. Major structural internal change is required to deliver this level of coherence. Without this they too will face Nokia’s dilemma within the next three years.

As for Google, they are now dependent on one of the major OEMs successfully making that change and choosing Android as the backbone of that strategy. That change needs to come about sooner rather than later as, unlike Microsoft, there will be no interest on Googles part – or more precisely on Google’s shareholders part - in bailing out an OEM on the slide and taking on the margins associated with manufacturing. Google’s strategy of piggybacking on an OEMs manufacturing business to grow an advertising model only works where you have successful and strong OEMs on which to piggyback. I can see this coming horribly unstuck at some point soon.In the meantime, expect the tie up between Nokia and Microsoft to get ever stronger. Microsoft needs Nokia’s distribution and mobile manufacturing expertise to complete its portfolio of business and home consumer products. Nokia needs not just Microsoft’s OS but also its Xbox customer base, its IPTV products, and its reach into the business community to re-invigorate its offering and be seen as a major competitor to Apple.

In short, the synergies between the two are so strong, that I cannot see the two companies existing as independent entities in three years time.

Impasse over online video standards is one piece of a bigger picture

Mashable recently produced an excellent commentary on the on-going battle over video codec support in HTML5 http://on.mash.to/dNezlE. A few days ago, Google quietly announced that it will stop supporting for the widely used H.264 codec schema (MPEG4 part 10) in HTML5 as implemented in Chrome.

Esoteric as this topic may sound for many, it’s a decision that sets Google on the path to war with Microsoft and Apple over the future of web video. HTML5 is widely seen as the software platform on which true service convergence across multiple device types from multiple manufacturers can be most easily and economically supported. Appropriately designed, it should be possible to use the same standards, code and content formats for an application delivered to phones, tablets, PCs and TVs from multiple manufacturers. Hence, in order to have a world where consumers can make separate choices over device supplier AND entertainment provider, it matters hugely who prevails in this debate.

Google’s stated reason for dropping H.264 is that it is a proprietary technology controlled by the MPEG LA, a firm that licences patents for a price. Its own alternative, WebM, is royalty free. On the face of it, Google’s decision to support the lower cost option would appear to be good news for content producers and distributors.

However, the broader context of this move warrants closer scrutiny. In addition to owning the organisation responsible for managing the development of WebM, Google has also recently acquired Widevine, widely regarded as one of the most appropriate and capable DRM systems for online video streaming. Hence, the company has control of two major pieces of technology that determine how web distributed video content is encoded and protected. Google also control Android, fast becoming the dominant OS in the smartphone market and about to break onto the connected TV scene with almost certainly similar impact.

As a result, Google is quickly piecing together control of all of the key software elements required to deliver a large scale video entertainment service on mobile phones, tablets, and, most importantly, the TV screen.

Should Android become the de facto software environment for devices within the connected home, the decisions Google makes regarding the future evolution of the platform, what technologies to support and what not to support, and how to monetise content on those platforms become key determinants of the future success of OEMs, broadcasters and studios alike.

How might Google use this position? A key question exercising the TV industry is how the advertising market will evolve in a connected TV environment. Apple’s iAd service demonstrates very effectively how content and advertising can be brought from two different places and integrated seamlessly on the device within an app. In the iAd case, advertising is delivered from Apple’s third party platform, independent of the content producer.

Extend this concept to the connected TV (or set top box) and this capability represents a major threat to broadcasters delivering content to any broadband connected device. Google will have the power to monetise a TV advertising opportunity completely independently of the broadcaster. Consider the following scenario: American broadcaster ABC seeks to deliver content to a Sony connected TV based on the Google TV software platform. The user selects the CBS player catch-up app. However, recognising what type of app it is, the device requests a 30 second pre-roll ad from AdMob (another Google company) and serves this to the screen before launching the ABC catch-up app.

Extend this process to the selection and play out of individual programs from individual broadcaster catch-up services, and the potential exists for either Google or some other third party who controls the device to create on the fly at the device a “channel” complete with adverts based on linear content made available via broadcaster catch-up services. What is more, this whole process can be done without the knowledge or consent of ABC.

There will of course be checks and balances that are likely to prevent a platform owner from completely eliminating a broadcaster from the revenue stream as we see with current platforms today. However, it is quite conceivable that as Google TV’s share of the connected TV market grows and as its dominance of the software used to create and deliver the user experience increases, so broadcasters and studios will be “encouraged” to adopt Google’s device based TV advertising platform to provide a better and more personalised advertising experience to users within their mainstream TV programming. This will be in return of course for 30% of TV advertising revenue. It is this prize – a significant piece of the TV advertising market - that Google is ultimately seeking. At present, Zenith Optimedia estimate that the global TV advertising market is worth USD 180bn out of a total USD 443bn. This compares to an internet ad market of USD 70bn. Today’s battles between Holywood studios and companies such as Apple and Netflix over control of online and mobile video distribution are only a precursor to the battle for the bigger prize. As I’ve said previously, control over content rights and over the user’s device itself will be key. The recent purchase of NBC Universal by Comcast is just the start.

Author

Mike Grant has a long track record of successfully predicting major industry change. He identified the rise of the mobile as a personal entertainment device 5 years before the smartphone and 10 years before the iPhone, He anticipated the growth of Apple as a major power in mobile early in 1997, and the merger of Nokia and Microsoft two years in advance of the transaction. Follow Mike on Twitter @caruventures to receive this blog.